Luxury you can’t afford … to ignore
Richemont looks ever more promising as the rand shows increasing signs of brittleness, writes
Richemont, the luxury brands conglomerate with a strong South African connection, now looms even larger in investors’ minds with the rand showing worrying signs of brittleness.
While the usual mining heavyweight stocks BHP Billiton, Anglo American, Glencore, South32, AngloGold and Sibanye carry cyclical risk, Richemont conveniently offers both growth and defensive properties.
With Chinese consumers returning after prolonged Covid lockdowns, Richemont enjoyed bumper profits in the year to end-March. CEO Jérôme Lambert summarised matters succinctly at the investor presentation: “We saw the group’s strongest performances in Japan and across Europe. Japan led the way with a 56% increase in sales at constant exchange rates, with strong double-digit increases across all channels and business areas. Sales in Europe were 31% higher than the prior year, driven by outstanding growth in both the retail and wholesale channels and a solid performance across all business areas with strength in all main locations, led by France, Italy and Switzerland.” That’s not the kind of commentary emblazoned across the results of SA Inc companies.
Richemont sales also benefited from inbound tourism, mainly from the US and the Middle East. Interestingly, Lambert said the largest absolute contribution to group sales growth came from Europe and the Americas, with each growing by about €1bn.
In short, Richemont managed to bump up operating profit by €1.3bn (that’s R27bn folks!) to €5bn on a stout (and enviable) operating margin of 25.2%. Cash flow from operating activities topped €4.5bn which is roughly equal to the combined market capitalisation of local retailers Woolworths, Pick n Pay and Dis-Chem (give or take a few billion rand).
In terms of momentum, it’s worth noting that Richemont’s sales in the fourth quarter progressed by 22% year on year, with double-digit increases in all regions.
For the 2023 financial year, the jewellery segment which centres on Cartier and Van Cleef & Arpels was again the star performer, holding a glittering margin of 35%. Still, there have been questions about the continued demand for jewellery brands and the onset of new competition.
Cartier CEO Cyrille Vigneron said there was still a growing demand for jewellery and for branded jewellery overall. “So as far as there is growth in world wealth, there is growth for luxury goods, and there is increasing growth for jewellery. So even if there is more competition, there’s much more demand. So, there is room
He said in terms of international brands in jewellery, there were very few. “And so there is room for growth. So as far as we believe there is room for economic growth in the world, there will be room for growth in branded jewellery.”
Vigneron did caution about high volatility, which precluded expectations of linear growth. “We have to be ready for cases where we can have contractions and cases where we have rebounds, as we have seen in the past 10 years.”
Van Cleef & Arpels CEO Nicolas Bos reiterated that the jewellery market is still dominated by nonbranded creations. “But I’m thinking of an example like Thailand, for instance, which is a country with a very, very strong history of jewellery a history of local jewellers and local designers. In the past few years, we’ve seen that market really opening up quite strongly to international brands such as Cartier, Van Cleef and others. That’s becoming quite a significant market, which it wasn’t for us even five or 10 years ago. And we have many other examples like that.”
Bos said building strong branded jewellery niches would take time and additional investment. “There will be cycles, but there is still a lot of room for growth
Overall, Richemont, which hearteningly saw its fashion and accessories segment return to profit, seems confident of overall prospects. This confidence was
At the end of the financial period Richemont was sitting on €6.5bn in cash
underlined by the declaration of a special dividend to plump the annual distribution.
At the end of the financial period Richemont was sitting on €6.5bn in cash. That’ sa heap of money, but cash piles are not uncommon in Rupert family-controlled companies where a flush balance sheet is viewed as an insurance policy against unforeseen setbacks. The cash buffer means the Richemont balance sheet can absorb a hit from a major economic setback and gives plenty reassurance for future dividend flows, even if trading conditions tighten. If they do tighten, then Richemont has the war chest to make authoritative advances on any strategic opportunities. Certainly, there is still work to do in bulking up the brand offering and, indeed, profits in Richemont’s soft luxury (leather goods and accessories) segment.
In short, Richemont, on paper, seems a great place to be for local investors. But it’s an expensive option to insulate against rand weakness, with Richemont trading on a historic earnings multiple of 28 and a forward multiple of 22. In comparison with SA Inc stocks, even the few in sweet spots, this is a rather rich rating. Some punters might maintain that the quality of earnings — backed by strong cash flows — and the group’s brand strength warrants the premium price. Clearly there are more than a few investors who hold that view, with Richemont regularly testing new highs during IM’s May month production cycle.
One of the weights lifted off sentiment for Richemont has been its pragmatic repositioning of what might have been an overly ambitious thrust into building an imposing online presence — a veritable Amazon of the luxury goods sector. This centred on Richemont’s costly dalliance with businesses that eventually morphed into Yoox-Net-a-Porter (YNAP).
What has since transpired is that Richemont struck up an agreement with French online retailer Farfetch and Chinese online giant Alabbar to acquire 47.5% and 3.2% of YNAP respectively — leaving Richemont with a 49.3% holding in YNAP with 12%-13% of Farfetch’s issued share capital.
Richemont has indicated that the initial stage of the transaction is expected to be completed by the end of 2023. But this does mean from this point onwards Richemont’s Maisons will adopt Farfetch’s technology to realise their
LNR (luxury new retail) vision. More importantly, YNAP will also adopt Farfetch Platform Solutions to push its shift towards a hybrid model — allowing it to market itself as a neutral industry-wide platform to other luxury goods brand owners.
Richemont’s online retail channel — comprising the group’s online sales directly generated by its many
Maisons and Watchfinder — contributed 6% of total sales.
In a note to clients, Sanlam Private Wealth (SPW) CIO David Lerche said
Richemont’s latest results confirmed that online sales meant luxury brands may now be in the enviable position of being able to grow sales well ahead of store network expansion.
He argued that this should support margins given the high fixed costs within the business model, while also shifting the cost structure to be more variable (such as paying delivery costs vs rent). “Our key concern is whether brand equity can be maintained while growing volume.”
SPW has revised estimates to take account of the latest results, and its updated modelling points to earnings from continuing operations of €7.18 a share, €7.85 a share and €8.44 a share in financial years 2024, 2025 and 2026 respectively.
Lerche contended that Richemont should trade at an 18.3 earnings multiple (adjusted for the cash holding). “At the current price, the group is trading at a 19.5 times earnings ex-cash and a 4.9% forward yield … Looking through the cycle, we value Richemont at €155 a share, which equates to R2,800 a share using R18/€.”
But Lerche did concede that Richemont’s combination of strong operating performance, much cleaner numbers after the YNAP deal and net cash position meant there was scope for the share to trade above SPW’s updated fair value.
Lerche also pointed out that Richemont’s net cash position of €6.5bn is now equivalent to roughly 1.1 times the expected financial 2024 operating profit. “Management’s long-term stance of not layering financial leverage on operating leverage helped the group through the Covid crisis and means there is ample capital available for deployment should the opportunity arise.”
But Lerche contended that “if Richemont’s latest earnings base is sustainable, the group will need to either materially increase its dividends or make substantial acquisitions to prevent further build-up of cash”.
Edouard Aubin, an analyst at Morgan Stanley, broached the acquisition question at the investor presentation. Aubin pondered: “Your balance sheet is indeed incredibly strong. You’re returning capital to shareholders. But obviously, you have the balance sheet to make an acquisition. I know no-one knows what you expect over the long term, but what would you say is the probability that you make a material transaction over the next 12-24 months?”
Richemont executive chair Johann Rupert — who has a strong background in mergers and acquisitions from his early investment banking days — was philosophical. “I tend to find in my past that the companies that are easy to buy … normally, there’ sa reason why they’re very easy to buy. And you always underestimate the difficulty of fixing it. The most difficult thing is inevitably the culture. That takes a lot longer than anything else.”
Rupert said Richemont had been more successful in buying smaller companies with great (corporate) cultures, and then empowering them. “If there’s a financial meltdown, yes, maybe we’ll look at bigger companies that are not performing because of exogenous factors, external factors. And yes, then we will look. But at this stage, the terrible thing is the companies that are really nice are not for sale. And that’s across the board.”
There are a lot of moving parts at Richemont, but IM reckons the share is a luxury local investors cannot afford … to ignore. ●